Scottrade Commission Free ETFs Review

I admit that I have a bias toward Scottrade, the discount broker that holds most of my investment assets. It is not just because I have been using it for nearly 10 years as my main broker to buy stocks and ETFs, or that it has treated me well as a customer over the years. All these contribute to my decision to stay with it even though Scottrade doesn’t have the cheapest commission ($7 per online trade, regardless the number of shares in the transaction). But I also like that Scottrade constantly brings new products and services to its customers to improve their experience.

Last week, Scottrade became the latest discount broker to offer commission free ETFs to it customers, joining the competition with some of its larger rivals. In my early post on where to buy ETFs for free, I noted that several brokerage firms, including Fidelity, Vanguard, TD Ameritrade and Charles Schwab, have been to let their customers trade exchange-traded funds (ETFs) without commission charges in the past couple of years. The difference between these offerings isn’t just what and how many ETFs are commission free, but also where the funds come from. Of the four, Vanguard and Schwab all issue their own ETFs, so it’s understandable that only their own ETFs are allowed to be traded without commission. As for Fidelity and TD Ameritrade, their ETFs are from third parties, such as iShares, so they can give investors more choices of funds, not just from one issuer.

For Scottrade, it followed the same approach as Vanguard and Schwab, that is, launching its own ETFs and offering only those ETFs for free to its customers (of course, you can still buy other ETFs from Scottrade, but they won’t be commission free). As we know, most ETFs are essentially index funds, meaning that they take a passive investment approach by tracking some kind of indices. For Scottrade’s newly launched 15 ETFs, as listed below, they all track indices credited by Morningstar, which you may know as an investment research firm that rates mutual funds and stocks.

Focus Morningstar US Market Index ETF (NYSE:FMU)

Focus Morningstar Large Cap Index ETF (NYSE:FLG)

Focus Morningstar Mid Cap Index ETF (NYSE:FMM)

Focus Morningstar Small Cap Index ETF (NYSE:FOS)

Focus Morningstar Basic Materials Index ETF (NYSE:FBM)

Focus Morningstar Communication Services Index ETF (NYSE:FCQ)

Focus Morningstar Consumer Cyclical Index ETF (NYSE:FCL)

Focus Morningstar Consumer Defensive Index ETF (NYSE:FCD)

Focus Morningstar Energy Index ETF (NYSE:FEG)

Focus Morningstar Financial Services Index ETF (NYSE:FFL)

Focus Morningstar Healthcare Index ETF (NYSE:FHC)

Focus Morningstar Industrials Index ETF (NYSE:FIL)

Focus Morningstar Real Estate Index ETF (NYSE:FRL)

Focus Morningstar Technology Index ETF (NYSE:FTQ)

Focus Morningstar Utilities Index ETF (NYSE:FUI)

Even though those Morningstar indices are not as widely used as other indices, Scottrade and its subsidiary FocusShares are able to offer these funds at extremely low expense ratios (ERs), even lower than Vanguard funds. The Scottrade ETFs have ERs from 0.05% (US Market Index ETF) to 0.19% (Technology Index ETF). To see how low these ERs are, just compare FMU against its Vanguard equivalent, Total Stock Market ETF (VTI), which has an ER of 0.07%.

However, as we know, when it comes to selecting which funds to buy, costs such as expense ratios are not the only factor to consider. We also need to look at a few other things that will also affect a fund’s performance over time, such as tracking error of the fund’s underlying index and trading volume which will be reflected in spread. For Scottrade ETFs, they only account for 15 out of more 1,000 funds that are currently available, which means initially the trading volumes will be light and the spread will be large. Therefore, it may be better to take a wait and see approach.

Nevertheless, I still think this is a good move for Scottrade to step into the ETF business as exchange-traded funds have gotten a lots of attentions and increasingly become the favorite vehicle to build a diversified portfolio. If you are interested in getting a Scottrade brokerage account to invest in these new ETFs or other stocks, you can open an account with promo code KGKP0724and receive 3 commission free trades.